New Home Sales Slip but it’s not a Buyer Issue

August 31, 2016

Over the course of the last few years, analysts and others have been bemoaning a lack of millennial buyers. The concern is that young people are reluctant to buy, due in large part to high rates of student loan debt and a millennial lifestyle that values freedom and flexibility over being tied down to one location.

Now, though, it appears that buyers are interested in homes — but there aren’t enough of those homes to go around.

Low Home Inventory Presents a Challenge to the Real Estate Market

During the last couple of months, existing home sales have been slowing, and the National Association of Realtors says it has more to do with low inventory than anything else. Existing home sales for July dropped by 3.2% according to the National Association of Realtors, and overall pending home sales are down as well.

However, it’s not a buyer issue anymore. It’s turning into an inventory issue. There are fewer homes on the market right now, and that means that buyers who are interested have to compete for an inadequate supply. The low inventory is driving up home prices, and that is causing some buyers to step back and re-evaluate the idea of buying.

Earlier this year, home sales got a bit of a boost. Low mortgage rates enticed borrowers to commit. On top of that, there were some good deals available to potential homebuyers. An improving job situation also helped home sales, as more would-be buyers felt more comfortable with their financial situations.

As demand rose, though, so did prices. Home prices are on the rise in many markets, and that makes it harder to find deals. Prices are also responding to the smaller supply of homes available for purchase. Because median home sales prices are moving up above what some people feel they can afford — even with improvements in the job market — the situation is changing and buyers who were excited to buy earlier in the year are now pulling back.

According to recent data from Redfin, new listings are dropping. Fewer homes are being listed than a year ago, a trend that has been developing throughout this summer. Bidding wars have been cropping up in some markets, pushing up home prices in general. Without a supply of homes to match demand, the real estate market is a little bit out of sorts and hasn’t returned to a healthy situation.

Demand for homes has overwhelmed the inventory, with only 4.3 months’ supply of new homes available on the market, as compared with 5.2 months during this time last year. With the year-over-year supply of homes dwindling, it’s little surprise that home sales are suffering. Homebuilders, on the other hand, appear to be prospering. They can’t keep up with the demand, and they are still able to sell their homes at higher prices.

While this looks like a good deal for those on the supply side of the equation, the good times might not last. With home prices continuing to rise and buyers starting to be priced out of the market as a result, we could see another drop for the housing market. If home buyers can’t find good deals now, they will withdraw from the market until prices fall. As demand drops off, prices are likely to fall again soon as well, and that could mean more affordable homes next year.

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